FX International Payments
By Bill Camarda
ISO 20022 enables far more information, including remittance data, to be embedded with electronic payments. Using this information, businesses and financial-service providers can build powerful new solutions and better automate everyday processes. For businesses, the advantages may include higher rates of end-to-end straight-through processing, easier payment tracking and reconciliation, and better compliance. By providing more information, ISO 20022 may also support creative new financial applications for both consumers and businesses. And, as international payers and payees can increasingly count on ISO 20022 data at both ends of their payment transactions, it may also begin improving the efficiency of cross-border transactions.2
SWIFT, the financial-messaging provider whose network supports most cross-border transactions, estimates that ISO 20022 will dominate the global high-value payments business within five years, supporting 79 percent of payment volume and 87 percent of value worldwide. SWIFT notes that forthcoming ISO 20022 implementations throughout the Eurozone, the U.S., and the U.K. will join systems already operating in Switzerland, Japan, China, and India.3 ISO 20022 has already become the dominant standard for instant payments, with implementations in Australia, the U.S., Canada, Sweden, Denmark, and Singapore.4 ISO 20022 is also growing in securities and foreign currency exchange markets. For example, it is used in Europe's TARGET2-Securities settlement system; by the Singapore Exchange; and in FX settlement via the large bank-owned CLS system.5
The U.K. and Canada offer representative examples of ISO 20022's growing momentum. Within the U.K., three inconsistent formats are currently used to send credit payment information: CHAPS, based on SWIFT MT messaging; Bacs (Standard-18); and the Faster Payments Service (FPS), which uses the older ISO 8583 standard. The infrastructure underlying these retail payment systems is being renewed, and they will all be consolidated onto ISO 20022 messaging, which is central to the U.K.'s New Payments Architecture (NPA).6 In choosing ISO 20022, NPA's planners explicitly noted its potential for cross-border transactions, especially connectivity to Europe's SEPA system for immediate payments.7 They believe ISO 20022 compliance will also simplify support for the U.K.'s Open Banking initiative.8
Payments Canada has chosen ISO 20022 as the lingua franca for updating Canada's current Automated Funds Transfer (AFT) batch payment system, replacing its existing Large Value Transfer System (LVTS), and building an entirely new Real-time Payments Rail (RTR) that will go live in mid-2019.9 By standardizing on ISO 20022, it intends to gradually eliminate the cost and effort associated with managing multiple standards, while also preparing for easier cross-border transactions as ISO 20022 implementation moves forward elsewhere.
Payments Canada notes that its largest trading partner, the U.S., has committed to eventual ISO 20022 adoption, starting with high-value payments.10 Late in 2017, the Federal Reserve announced plans to migrate its Fedwire real-time gross settlement system to ISO 20022 in three phases, between November 2020 and late 2023.11 The Clearing House's Real Time Payments (RTP) system, rolling out between now and 2020, will also rely on ISO 20022 message formats.
Cross-border transaction processing has traditionally been more complex than domestic payments for many reasons, from incompatible payment data to Know Your Customer and Anti-Money Laundering rules. But as ISO 20222 adoption widens, some of these challenges may become easier to overcome.
SWIFT notes growing interest among banks in using ISO 20022 for cross-border transaction messaging, as an eventual replacement for its own MT standard. In April 2018, SWIFT launched a "full-scale community consultation" on its vision for migrating cross border payment services to ISO 20022.12 SWIFT envisions a three-phase migration: first, an optional Closed User Group for early adopters; then a ‘coexistence' phase where MT and ISO 20022 users interoperate; and finally the use of ISO 20022 for all messaging. Schedules remain in flux, but if current national and regional systems stay on track with their ISO 20022 transitions, cross-border transactions via ISO 20022 should be available in 2021, and the major cutover could begin late that year, according to SWIFT.13
While ISO 20022 offers a foundation for financial payments standardization, early observers noted that it could be implemented in diverse ways that might limit interoperability and value. Anticipating these concerns, efforts are underway to promote harmonization. Notably, SWIFT's High Value Payments Plus (HVPS+) task force has established several best-practice standards for ISO 20022 implementation, and is moving forward with additional work.14
In the U.S., the Fed and The Clearing House have each contributed to that effort, and promise to align their final ISO 20022 implementations with HVPS+ guidelines.15 Non-U.S. participants in HVPS+ have included the European Central Bank, the Bank of England, Hong Kong Interbank Clearing Limited, and key global banks.16 Given progress towards harmonization, JPMorgan Chase head of faster payments Art Brieske recently said he expects to be able to adapt the bank's global payments and foreign exchange platform for new markets using ISO 20022 "with just a few [local] tweaks."17
Experts say that for ISO 20022 to achieve its full benefits, financial-services firms will want to use standardized Application Programming Interfaces (APIs) that enable consistent, secure access to ISO 20022 data and services for use in external applications. In November 2017, 23 countries, including China, Singapore and the U.K., agreed to pool resources and focus effort on defining a worldwide ISO financial services API standard that meets today's technical requirements.18
In January 2018, the ISO team provided preliminary best practice suggestions for decreasing implementation time, simplifying application mash-ups, and fostering reuse. These suggestions are expected to inform a more complete technical specification later.19 If these ISO API standards ultimately succeed, they may become a key element of future cross-border payment systems and applications.
Progress toward widespread ISO 20022 adoption is accelerating. Large financial stakeholders are beginning to look past domestic implementations towards an era when comprehensive, standardized financial message data is used to simplify and accelerate complex cross-border transactions.
Bill Camarda is a professional writer with more than 30 years’ experience focusing on business and technology. He is author or co-author of 19 books on information technology and has written for clients including American Express Private Bank, Ernst & Young, Financial Times Knowledge and IBM.
1. “SWIFT ISO 20022 Migration Study,” SWIFT; https://www.swift.com/resource/iso-20022-migration-study
2. “How ISO 20022 is driving the Canadian payments migration,” Bobs Guide; http://www.bobsguide.com/guide/news/2018/Mar/26/how-iso-20022-is-driving-the-canadian-payments-migration/
3. “SWIFT ISO 20022 Migration Study,” SWIFT; https://www.swift.com/resource/iso-20022-migration-study
4. “ISO 20022 migration: the time is now,” SWIFT; https://www.swift.com/news-events/news/iso-20022-migration_the-time-is-now
5. “SWIFT ISO 20022 Migration Study,” SWIFT; https://www.swift.com/resource/iso-20022-migration-study
6. “The language barrier: Payments babel fish - ISO 20022,” Faster Payments UK; http://www.fasterpayments.org.uk/press-release/language-barrier-payments-babel-fish-iso-20022
7. “Blueprint for the Future of UK Payments: A Consultation Paper – July 2017,” Payments Strategy Forum (UK); https://implementation.paymentsforum.uk/sites/default/files/Consultation%20Document.pdf
8. “The language barrier: Payments babel fish - ISO 20022,” Faster Payments UK; http://www.fasterpayments.org.uk/press-release/language-barrier-payments-babel-fish-iso-20022
9. “How ISO 20022 is driving the Canadian payments migration,” Bobs Guide; http://www.bobsguide.com/guide/news/2018/Mar/26/how-iso-20022-is-driving-the-canadian-payments-migration/
10. “Modernization Target State: Summary of the Key Requirements, Conceptual End State, Integrated Work Plan and Benefits of the Modernization Program,” Payments Canada; https://www.payments.ca/sites/default/files/21-Dec-17/modernization_target_state_en_final.pdf
11. “Federal Reserve Announces ISO 20022 Migration Timeline for the Fedwire® Funds Service,” Federal Reserve; https://fedpaymentsimprovement.org/news/press-releases/federal-reserve-announces-iso-20022-migration-timeline-fedwire-funds-service/
12. “ISO 20022 migration: the time is now,” SWIFT; https://www.swift.com/news-events/news/iso-20022-migration_the-time-is-now
13. “SWIFT ISO 20022 Migration Study,” SWIFT; https://www.swift.com/resource/iso-20022-migration-study
14. “High Value Payments Plus (HVPS+) – the next stage step towards ISO 20022 Harmonisation,” SWIFT; https://www.swift.com/news-events/news/high-value-payments-plus-hvps_the-next-stage-step-towards-iso-20022-harmonisation
15. “Deep Dive into the ISO 20022 Implementation Strategy for U.S. High-Value Payment Systems,” The Clearing House and The Federal Reserve; https://fedpaymentsimprovement.org/wp-content/uploads/101817-iso20022-deep-dive.pdf
16. “SWIFT Sets ISO 20022 Sights On High-Value Payments,” PYMNTS.COM; https://www.pymnts.com/news/b2b-payments/2016/swift-iso-20022-high-value-payments-task-force-cross border-messaging-standard/
17. “JPMorgan’s Interest In National and International RTP,” PYMNTS.COM; https://www.pymnts.com/news/faster-payments/2018/jpmorgan-national-international-rtp/
18. “ISO standard for APIs - Whitepaper,” ISO; https://www.iso20022.org/news/iso-standard-apis-whitepaper
19. “ISO 20022 and JSON: An Implementation Best Practices Whitepaper,” ISO 20022.org; https://www.iso20022.org/sites/default/files/documents/general/ISO20022_API_JSON_Whitepaper_Final_20180129.pdf